Recovery uncertain despite swift war

Carriers are resuming services to the Gulf with the end of the Iraq war, but the damage done to traffic has pushed back the prospects of recovery and left US carriers calling for state help, in turn raising the spectre of a transatlantic aid row.

As the rebuilding of Iraq begins, airlines are still counting the cost of yet another crisis provoking a further round of capacity and job cuts.

Preliminary figures from North America and Europe show the extent of the decline. The US Air Transport Association (ATA) reports that systemwide traffic fell by some 14% in the three weeks after fighting broke out in mid-March. Traffic was down 23% on the Atlantic and 19% across the Pacific, while domestic travel fell 10%. Capacity cuts followed swiftly, with seats on the transatlantic down by more than 20%by the time the war drew to a close.

Overall, March traffic looks like being down by around 7% for the major North American carriers, but is closer to 15%lower than in March 2001, before the events of 11 September sent the market into a tailspin. Europe's largest carriers also averaged a fall, albeit more modest, of 6%against March 2001.

The Association of European Airlines (AEA) reports that, for the first three weeks of the conflict, overall traffic for its members was down by just over 10% compared with the previous year. On routes to the Middle East the average traffic loss was 46.8%.AEA secretary general Ulrich Schulte-Strathaus, points out that by 6 April - after three weeks of fighting in Iraq - all the modest 3.5% growth seen by members during the first 10 weeks of 2003 had been wiped out.

Asia-Pacific carriers, which were expecting relatively little fall-out from the second Gulf War, have been hit from another direction - the impact on traffic of Severe Acute Respiratory Syndrome SARS (see page 9). The effect of SARS is seen in the March 2003 figures for Cathay Pacific and Singapore Airlines, which show a 10% fall compared to the same month last year.

Prior to the start of hostilities in the Gulf, ATA's most likely war scenarios had its members losing from $6.7 billion in 2003 without any war, to $10.7 billion with an overall 15% traffic decline. UBS Warburg has widened its loss estimate for US carriers in 2003 to $7.8 billion from its previous estimate of $6.6 billion, on the back of the war and SARS.

IATA warned early on that the impact of war could "easily add $10 billion of losses" on international traffic by extending the current traffic slump "well into the summer".

As war hit, US carriers once again lobbied for state aid, and Congress has approved a $3.1 billion package for US airlines, particularly suspending passenger and airline security fees from June for three months.

This has riled European airlines and Brussels, and has given fresh impetus to the quest by the European Commission to gain the power to fine carriers from outside the European Union (EU) deemed to have benefited from unfair state support.

State-aid challenge

The ECis calling for transport ministers and the European Parliament to adopt proposals giving it powers of sanction "as soon as possible". The proposals were put forward in March 2002 after US and Swiss airlines received massive bailouts from their respective governments as their airlines ran into trouble in 2001.

As in the aftermath of 11 September, the EC is making a clear distinction between support for the direct affects of war and propping up ailing carriers. "The impact of the war in the civil aviation sector, which is already confronted with a need for consolidation, should not be overestimated," says the EC. Brussels says it is willing to suspend the "use-it or lose-it" rule on airport slots for summer 2003 and will give a "favourable examination" to aid intended to offset additional security costs.

European airline lobby groups, meanwhile, have been pushing Brussels to hold off legislation increasing the regulatory burden on airlines. "We cannot absorb any additional cost increases," says the AEA's Schulte-Strathaus.

European carriers are undoubtedly relieved that the war in Iraq has been shorter than some feared and have already started adding back capacity to affected regions.

Even though war is all but over, few are willing to commit themselves to predicting an early recovery, and most are pushing estimates for recovery to 2005 at the earliest. Analysts are writing off 2003 and Chris Tarry, consultant at CTAIRA, warns that it is important to keep a sense of perspective. "We live in a fundamentally different world," he says, pointing to the continued risk of terrorist attacks, the refusal of corporate travellers to pay the sort of fares they were paying a few years ago, and the continued problem of overcapacity.

He notes that ATA figures show that there are only 65 fewer mainline aircraft in member fleets compared to the end of 2001, and says that even if many aircraft have been grounded, "this hardly represents a cut in capacity". Moody's senior credit analyst Richard Bittenbender sees liquidity returning in 2004 or 2005 for US carriers, earnings and cash flow possibly recovering in 2005, and a possible capital structure recovery by 2008 at the earliest.

Nick van den Brul, London-based financial analyst at BNP Paribas, says that events are likely to follow a similar pattern to the aftermath of the 11 September attacks, when capacity cuts announced in October and November 2001 fed through into the bottom line around nine months later. He also sees the benefits from falling fuel prices in the second half of this year.

On the long-haul markets, the traditional source of profits for Europe's flag carriers, Brul says much depends on the recovery in the US economy.

Source: Airline Business